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On Fed Created Distortions

This is what happens in a centrally planned economy. When people learn that the market is rigged, they leave the market.

One of the reasons that Uncle Ben is flooding the market with printed money is to reduce volatility in the stock market. Volatility can lead to a panic, and a panic would be disastrous in our weakened economic state.

People have adjusted to the existence of the Bernanke Put. Short-sellers, put purchasers and other bears have been burned so many times in the last two years by market-distorting liquidity injections. In response, they have left the building. Bears are useful, because they add liquidity to the market by standing willing to sell securities. This liquidity has been crowded out by the Fed’s action.

Investing has nothing to do with fundamentals anymore. All investors are attempting to front-run the Fed’s next rounding of money printing, and they have bid up the asset markets to near record highs. Expensive markets are risky markets, so paradoxically the Fed has actually increased systemic risk.

If the markets were still functioning and not dysfunctioning, short-sellers would have stepped in and provided the necessary selling pressure that would have tamped down the exuberance of the markets. This is no longer happening, and we are all the worse off for it.

While Uncle Ben thinks that he has pulled off quite the coup by purging volatility from the system, he has actually guaranteed the next crisis, which will make the GFC look like a correction. Retail investors want no part of this and have been leaving the stock market slowly but surely over the past few years. Mutual fund outflows and declining ETF trading show that this trend has not abated.

This whole scenario is actually playing out like a Greek tragedy. Our protagonist is attempting to avoid fate, but the very actions he takes make this fate more likely and more catastrophic.

Bernanke is a student of the Great Depression. Bernanke is what is known as a “reflationist.” With 20/20 hindsight, reflationists believe that had the Federal Reserve of the 1930’s merely loosened monetary policy, the whole depression could have been avoided.

Reflationists are merely another version of interventionists that have taken over the intellectual mainstream. As such, all they believe in is intervention. The United States substantially eased monetary policy throughout the 30’s by running large budget deficits and devaluing the dollar.

A common interventionist trope is that if the intervention fails, then it wasn’t large enough. This is the road that Bernanke is leading us down. He believes that the problem with the monetary easing during the depression was that there was not enough of it, and now the only thing wrong with QE1, QE2 or Operation Twist was that we needed to more of it.

When you believe something for your entire adult life, writing papers, making speeches and teaching students these ideas, then it is way too late to change your mind at 58 years old. He keeps throwing money, our tax payer money, at our economic problems by purchasing assets from the banks and offering these same banks cheap financing. All the while, he never stops to consider that his actions are part of the problem.

Ultimately, the taxpayer is the one bearing the present costs of these dangerous policies. High gas prices are one effect of money printing. Another are these low trading volumes.

The taxpayer will also bear the costs of these policies after the next market crash. All of those securities on the books of the Fed will plunge in value creating a massive loss and unleashing the pent-up instability of the past few years.

Don’t worry about Uncle Ben. He’ll be fine. These cheap loans and asset purchases have guaranteed him a cushy job in one of the banks he subsidizes. It is the rest of us who will be cleaning up this mess for a generation.

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One thought on “On Fed Created Distortions”

No, people are leaving the market 1) because many are broke, ruined in the wake of a decades-running debt trap sprung in 2008, and 2) more understand the true risk existing at the bottom rung of the capital structure within equities.

(Yet junk bonds, themselves equity, present a measure of “irrational exuberance” in equity offering exceptional returns, thus paradoxically revealing liquidity is not a vexing problem, but rather the problem is confidence).

One can never forget the Fed is lilliputian in the face of global capital markets. Its only effective regulatory capability was given away during the Greenspan years recklessly overseeing parabolic expansion of a fraud-rife debt trap. The Fed is virtually insolvent on every count. This is not to say a support network pretending otherwise cannot be hoisted upon the world. It can be and it is.

Investing is no less to do with fundamentals now than any time ever before. Somehow 3M made it through the vicious years of 1929-1932 losing only a single digit percentage from its peak. Fundamentals exist within a context of macro circumstance effecting finance at every layer of the capital structure. Underlying it all is confidence.

One thing you’re missing in the dynamics of de-leveraging is how equity must by necessity become an increasing portion of a financial enterprise’s capital exposure. Indeed, it is in the very interest of TBTF banks and white shoe firms alike that, equity be supported. Yet we agree this effort is in vain on account de-leveraging is a dream — leverage must expand, lest the credit bubble debt trap collapse — and much debt is in fact illegitimate and becoming all the more so as lenders of last resort are dragged into the morass. Being so, this is how “the Fed has actually increased systemic risk,” by willfully making itself insolvent.

I think you’re missing how short sellers especially now are rather serving to keep equities propped up. They’re being raided and forced to cover, thus exploiting a broken pricing mechanism to create the illusion of value in equities.

Per “The United States substantially eased monetary policy throughout the 30′s by running large budget deficits and devaluing the dollar,” if this hadn’t been done, how do you suppose that little tussle we had with that douche bag Hitler would have gone? I ask particularly with knowledge that the very same financiers who were backing Hitler likewise created physical circumstance necessitating large budget deficits, as the economy had been driven into the ground by way of that era’s debt trap. It’s no different now. Not one bit. The same filthy imperial intent is propping up the Fed and creating circumstance feeding chaos the world over, setting up for asset grabs on the cheap while mowing over the rights of man.

Contemporary arguments among so-called “respectable” players are nothing but diversion — a smoke screen. We would all be better served not playing into this.

You are mistaken to think we well be paying for this a long time to come. All we need do is cancel the bailout through a Glass-Steagall reform, reclaim constitutional power to form a national bank employing a credit system aimed to raise the productive capacity of the U.S. economy, and make a priority great projects whose end both ventures that, as well as creates conditions where debts incurred in the effort will be paid back many times over. It’s as simple as that and can be ended in a single election, were the American people given something other than died-in-the-wool fascists pretending to be qualified leaders. The party system is dead.